2016-

2017

Quantitative
Macroeconomics
Problem Set
BARDY Tess, BRODARD Lionel






Professor Andreas Tischbirek
University of Lausanne (HEC-DEEP)
QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

Q1/ Simulating AR(1) Processes in Matlab

See Matlab file Q1.m, Q1_1.pdf and Q1_2.pdf

Q2/ Consumption Dynamics and the Business Cycle
1. Interpret the household’s utility function for 𝜸 = 𝟎 and 𝜸 = 𝟏.
&'(
& )*
The household has the following utility : - − 𝜒𝐷1 (1 − 𝑙1 )
&'( )*+,

a. Household’s utility function for 𝛾 = 0:

&'(
1 𝑐1 1
− 𝜒𝐷1 (1 − 𝑙1 ) → 𝑐 &'( − 𝜒𝐷1 (1 − 𝑙1 )
;
1 − 𝜎 𝑐1'& 1−𝜎 1
The household’s utility depends positively on the consumption in period t and negatively on
the hours worked.
b. Household’s utility function for 𝛾 = 1:
&'( &'(
1 𝑐1 1 𝑐1
& − 𝜒𝐷1 (1 − 𝑙1 ) → − 𝜒𝐷1 (1 − 𝑙1 )
1 − 𝜎 𝑐1'& 1 − 𝜎 𝑐1'&
The household’s utility depends now positively on the consumption ratio between period t
and t-1 and still negatively on the hours worked. We don’t consider only consumption en t,
but both consumption in t and t-1. Both consumption have the same weight as 𝑐1'& is not
actualized. The more 𝑐1'& is high, the more 𝑐1 has to be high too in order to maintain the
level of utility.
2. How can you interpret the variable 𝑫𝒕 :
The variable 𝐷1 could represent the work aversion. For a given ℎ1 , the more 𝐷1 is high, the more
the negative impact of work on utility is high. And obviously the less 𝐷1 is high, the less the
negative impact of work on utility is high.
3. Derive the first-order conditions of the household’s utility maximisation problem and the
firm’s profit maximisation problem
a. Derivation of first order condition of the household’s utility:
Using the Lagrangian approach, we have:
I

max 𝐸; 𝛽 1 𝑈(𝑐1 , 𝑙1 ) + 𝜆1 [𝑤1 (1 − 𝑙1 ) + 𝑅1 − 𝛿 𝑘1 − 𝑐1 − 𝑘1T& ]

)* ; D* ;E*F,
1J;

Where:
&'(
1 𝑐1
𝑈 𝑐1 , ℎ1 = V − 𝜒𝐷1 (1 − 𝑙1 )
1 − 𝜎 𝑐1'&

So:

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QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

I &'(
1
1 𝑐1
𝐿1 = 𝐸; 𝛽 V − 𝜒𝐷1 (1 − 𝑙1 ) + 𝜆1 [𝑤1 (1 − 𝑙1 ) + 𝑅1 − 𝛿 𝑘1 − 𝑐1 − 𝑘1T& ]
1 − 𝜎 𝑐1'&
1J;

Exogenous shock of the model for the household’s utility problem:

ln 𝐷1 = 𝜌[ ln 𝐷1'& + 𝜀[,1
Where:
𝜀[,1 ~𝑁(0, 𝜎[_ )
First order conditions:
'( ,+c
`a* & )* )*F,
∶ - - − 𝛽𝛾𝐸1 - ,+c F, = 𝜆1 = 𝑈) 𝑐1 , 𝑙1 (1)
`)* )*+, )*+, )*

`a*
∶ 𝐸1 𝛽𝜆1T& 𝑅1T& − 𝛿 = 𝜆1 (2)
`E*F,
`a* d[*
∶ = 𝜆1 (3)
`D* e*

(1)(2) – Euler equation between consumption and capital

𝐸1 𝛽𝜆1T& 𝑅1T& − 𝛿 = 𝜆1 = 𝑈) 𝑐1 , 𝑙1
𝑈) 𝑐1T& , 𝑙1T&
𝐸1 𝛽 𝑅1T& − 𝛿 = 1
𝑈) 𝑐1 , 𝑙1
'( &'(
1 𝑐1T& 𝑐1T_
V V − 𝛽𝛾𝐸1T& V &'( T&
𝑐1 𝑐1 𝑐1T&
𝐸1 𝛽 𝑅1T& − 𝛿 = 1
'( &'(
1 𝑐1 𝑐1T&
V V − 𝛽𝛾𝐸1 V &'( T&
𝑐1'& 𝑐1'& 𝑐1

(1)(3) – Euler equation between consumption and leisure

𝜒𝐷1
= 𝜆1 = 𝑈) 𝑐1 , 𝑙1
𝑤1
'( &'(
𝜒𝐷1 1 𝑐1 𝑐1T&
= V V − 𝛽𝛾𝐸1 V &'( T&

𝑤1 𝑐1'& 𝑐1'& 𝑐1
𝜒𝐷1
𝑤1 = '( &'(

1 𝑐1 𝑐1T&
V V − 𝛽𝛾𝐸1 V &'( T&
𝑐1'& 𝑐1'& 𝑐1
b. Derivation of first order condition of the firm’s profit maximization:
Production function:
𝑦1 = 𝐴1 𝑘1h ℎ&'h
1 = 𝐴1 𝑘1h (1 − 𝑙1 )&'h
Exogenous shocks in this model:
ln 𝐴1 = 𝜌i ln 𝐴1'& + 𝜀i,1
Where
𝜀i,1 ~𝑁(0, 𝜎i_ )

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QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

The profit maximisation problem of the representative firm is given by

max 𝜋1 = max 𝐴1 𝑘1h (1 − 𝑙1 )&'h − 𝑤1 (1 − 𝑙1 ) − 𝑅1 − 1 𝑘1
E* ,&'D* E* ,&'D*

First order conditions:

`k*
∶ 𝛼𝐴1 𝑘1h'& (1 − 𝑙1 )&'h = 𝑅1 − 1 (1)
`E*
`k*
∶ (1 − 𝛼)𝐴1 𝑘1h (1 − 𝑙1 )'h = 𝑤1 (2)
`(&'D* )

c. Equilibrium
From the household side:
𝑐1 + 𝑘1T& = 𝑤1 (1 − 𝑙1 ) + 𝑅1 − 𝛿 𝑘1 (c.1)
+c ,+c
, m*F, m
- - 'nVo*F, - *Fp
,+c F,
m* m* m *F,
𝐸1 𝛽 +c ,+c
𝑅1T& − 𝛿 = 1 (c.2)
, m* m
- - 'nVo* - *F,
,+c F,
m*+, m*+, m *

d[*
𝑤1 = +c ,+c (c.3)
, m* m
- - 'nVo* - *F,
,+c F,

m*+, m*+, m *

ln 𝐷1 = 𝜌[ ln 𝐷1'& + 𝜀[,1 (c.4)

From the firm side:
𝑦1 = 𝐴1 𝑘1h ℎ&'h
1 (c.5)
𝛼𝐴1 𝑘1h'& (1 − 𝑙1 )&'h + 1 = 𝑅1 (c.6)
1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h = 𝑤1 (c.7)
ln 𝐴1 = 𝜌i ln 𝐴1'& + 𝜀i,1 (c.8)

(c.2)(c.6)
'( &'(
1 𝑐1T& 𝑐1T_
V V − 𝛽𝛾𝐸1T& V &'( T&
𝑐1 𝑐1 𝑐1T&
h'&
𝐸1 𝛽 𝛼𝐴1T& 𝑘1T& (1 − 𝑙1T& )&'h + 1 − 𝛿 = 1
'( &'(
1 𝑐1 𝑐
V V − 𝛽𝛾𝐸1 V 1T&
&'( T&
𝑐1'& 𝑐1'& 𝑐1

'VTV( '( &'( 'V &'( '&

𝑐1 𝑐1T& − 𝛽𝛾𝐸1T& 𝑐1T_ 𝑐1T&
h'&
↔ 𝐸1 𝛽 𝛼𝐴1T& 𝑘1T& (1 − 𝑙1T& )&'h + 1 − 𝛿 = 1
'VTV( &'( 'V &'( '&
𝑐1'& 𝑐1'( − 𝛽𝛾𝐸1 𝑐1T& 𝑐1

(c.3)(c.7)

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QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

'( &'(
1 𝑐1 𝑐1T&
1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h V V − 𝛽𝛾𝐸1 V &'( T&
= 𝜒𝐷1
𝑐1'& 𝑐1'& 𝑐1

'VTV( '( &'( 'V &'( '&

↔ 1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h 𝑐1'& 𝑐1 − 𝛽𝛾𝐸1 𝑐1T& 𝑐1 = 𝜒𝐷1

(c.4)
ln 𝐷1 = 𝜌[ ln 𝐷1'& + 𝜀[,1
(c.8)
ln 𝐴1 = 𝜌i ln 𝐴1'& + 𝜀i,1
(c.1)(c.6)(c.7)
𝐴1 𝑘1h (1 − 𝑙1 )&'h = 𝑐1 + 𝑘1T& − 𝑘1 + 𝛿𝑘1
(c.5)
𝑦1 = 𝐴1 𝑘1h ℎ&'h
1
(c.6)
𝑅1 = 𝛼𝐴1 𝑘1h'& (1 − 𝑙1 )&'h + 1
(c.7)
𝑤1 = 1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h
4. Steady-state solution
Recall all the solution of the RBC model
+-F-c +c ,+c +- ,+c +,
)* )*F, 'nVo*F, )*Fp )*F,
h'&
𝐸1 𝛽 +-F-c +c ,+c +- ,+c +,
𝛼𝐴1T& 𝑘1T& (1 − 𝑙1T& )&'h + 1 − 𝛿 = 1 (A)
)*+, )* 'nVo* )*F, )*

'VTV( '( &'( 'V &'( '&

1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h 𝑐1'& 𝑐1 − 𝛽𝛾𝐸1 𝑐1T& 𝑐1 = 𝜒𝐷1 (B)

ln 𝐷1 = 𝜌[ ln 𝐷1'& + 𝜀[,1 (C)

ln 𝐴1 = 𝜌i ln 𝐴1'& + 𝜀i,1 (D)
𝐴1 𝑘1h (1 − 𝑙1 )&'h = 𝑐1 + 𝑘1T& − 𝑘1 + 𝛿𝑘1 (E)
𝑦1 = 𝐴1 𝑘1h ℎ&'h
1 (F)
𝑅1 = 𝛼𝐴1 𝑘1h'& (1 − 𝑙1 )&'h + 1 (G)
𝑤1 = 1 − 𝛼 𝐴1 𝑘1h (1 − 𝑙1 )'h (H)
In the steady state we can set all exogenous shocks to their means and drop all time subscripts and
expectations operators.
𝑐−𝛾+𝛾𝜎 𝑐−𝜎 −𝛽𝛾 𝑐 1−𝜎 𝑐−𝛾 1−𝜎 −1
𝛽 𝛼𝐴𝑘 h'& (1 − 𝑙)&'h + 1 − 𝛿 = 1 (A’)
𝑐−𝛾+𝛾𝜎 𝑐−𝜎 −𝛽𝛾 𝑐 1−𝜎 𝑐−𝛾 1−𝜎 −1

=1

1 − 𝛼 𝐴𝑘 h (1 − 𝑙)'h 𝑐−𝛾+𝛾𝜎 𝑐−𝜎 − 𝛽𝛾 𝑐 1−𝜎

𝑐−𝛾 1−𝜎 −1
= 𝜒𝐷 (B’)

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QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

ln 𝐷 = 𝜌[ ln 𝐷 + 0 (C’)
ln 𝐴 = 𝜌i ln 𝐴 + 0 (D’)
𝐴𝑘 h (1 − 𝑙)&'h = 𝑐 + 𝑘 − 𝑘 + 𝛿𝑘 (E’)
𝑦 = 𝐴𝑘 h ℎ&'h (F’)
𝑅 = 𝛼𝐴𝑘 h'& (1 − 𝑙)&'h + 1 (G’)
𝑤 = 1 − 𝛼 𝐴𝑘 h (1 − 𝑙)'h (H’)

We can now introduce the capital-labour ratio as an auxiliary variable:
𝑘
𝑘𝑙𝑟 ≝
(1 − 𝑙)
Moreover, from equations (C’) and (D’), we get
𝐷 = 𝐴 = 1
As 0 < 𝜌[ < 1 and 0 < 𝜌i < 1
Finally, the steady state is given by:
𝐷 = 1 From C’
𝐴 = 1 From D’
,
&'n(&'u) v+,
𝑘𝑙𝑟 = From A’
hn
,
&'h &'nV EDw v +-cF-Fc
𝑐= From B’
d
)
𝑘= From E’
EDw v+, ' u
E
ℎ= From the definition
EDw

𝑦 = 𝑘 h ℎ&'h From F’
𝑅 = 𝛼𝑘𝑙𝑟 h'& + 1 From G’
𝑤 = 1 − 𝛼 𝑘𝑙𝑟 h From H’

5. For y=o, use Dynare to calculate the impulse function of Dt, yt, ct, ht, wt and Rt and to
isolate positive realisation of eDt.
See Q2.mod and Q2_1.pdf.
Intuitive explanation for the shape of IRFs:
As the work aversion grows (increase of D), agents’ utility decreases. Work becomes than less
interesting in term of utility. People are more attracted by leisure. That means that they will spend
less time working. When the shock occurs, h decreases immediately.
As h decreases, the output fall down since it directly depends on the hours worked. Therefore,
consumption declines in order to respect the budget constraint.

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QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

The increase of w can be explained by two different ways. The first is that as the total output declines,
the marginal productivity of labour increases and consequently by definition wages also (𝑤1 =
𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟). The second is that as people work less, the labour supply
decreases and the price (𝑤1 in the labour market) grows. As y progressively grow, the wages fall.
Finally, R decreases. As the output is lower than before the shock with the same amount of capital,
the marginal productivity of k falls down. Therefore, R falls down as it’s equal to the marginal
productivity of capital.

D y
0.015 0

0.01
-0.005
0.005

0 -0.01
5 10 15 20 25 30 5 10 15 20 25 30

#10 -3 c #10 -3 h
0 5

-1 0

-2 -5

-3 -10
5 10 15 20 25 30 5 10 15 20 25 30

#10 -3 w #10 -4 R
5 5

0
0
-5

-5 -10
5 10 15 20 25 30 5 10 15 20 25 30

6. Examine the effect of gamma on the response of consumption to technology shocks.

See Q2_2.pdf
For 𝛾 = 0, as we saw in the first question, the utility does not depend on the previous period. Agent
are focused on their current consumption.
When 𝛾 = 1, we saw previously that agent’s utility depends on the current but also negatively on the
previous period of consumption.
When 𝛾 = 0, the steady state is reached quicker than when 𝛾 = 1. Indeed, if we care only about the

#10 -3 IRF of c for gamma = 0 and gamma = 1

6

gamma=0
gamma=1

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0
5 10 15 20 25 30
Periods
QUANTITATIVE MACROECONOMICS 2016-2017 | Problem Set | BARDY Tess, BRODARD Lionel

today consumption, we consume what we need in period t and don’t care about the future
consumption. While if we care about our previous consumption, we know that it will have a negative
impact tomorrow. We are aware that our consumption has to be lower today when 𝛾 = 1 if we want
to have something tomorrow. In this last case, the steady state will be reach further

7. For 𝜸 = 𝟎, which fraction of the variance of period utility is driven by technology shocks?
The technology shock drives 69.02% of the variance of period utility.

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